4QFY21 net profit of RM30.5m topped our forecast on higher- than-expected ticket sales and HRO earnings. Nonetheless, 1QFY22 is likely to turn to the red again as lockdown continues but ticket sales should recover swiftly to 80%-85% pre-COVID levels upon re-opening. As such, its earnings remain resilient which supports an attractive dividend yield of >6%. OP retained at a lower TP of RM2.42.

4QFY21 above our expectation, with net profit surging 63% QoQ to RM30.5m, owing to stronger-than-expected ticket sales and HR Owen (HRO)’s earnings. This brought FY21 net profit to RM182.1m which beat our forecast by 17% but came below market consensus slightly by 7%. However, no dividend was declared which was a disappointment. Total NDPS in FY21 was 8.0 sen, against our forecast of 9.2 sen, implying earnings payout of 59%, the lowest since 2001, with a recent low of 69% in FY19.

Ticket sales recovered well prior to MCO 3.0. Despite flattish revenue, 4QFY21 net profit jumped 63% sequentially to RM30.5m largely due to better NFO earnings and further earnings improvement in HRO. While segment revenue fell 6% to RM449.7m which was due to lower draws of 28 from 45, NFO’s EBIT surged 67% to RM47.8m attributable to stronger ticket sales per draw of RM17.5m from RM11.6m, coupled with better luck factor (EPPR) of 62.2% from 66.5%. This was because ticket sales recovered to 80%-85% of pre-COVID level prior to the start of MCO 3.0 lockdown from June as opposed to c.15% during MCO 2.0 in 3QFY21. Meanwhile, HRO reported yet another record operating profit which rose 15% to RM28.4m, thanks to 5% hike in revenue on higher used car sales coupled with favourable GBP conversion into MYR.

HRO led earnings growth from last year. YoY, 4QFY21 turned profitable with net profit of RM30.5m from net loss of RM43.3m in 4QFY20 when the NFO unit only conducted six draws due to 2.5- month MCO 1.0 lockdown as compared 28 draws in 4QFY21. HRO also reported RM8.3m operating loss last year due to its operations being temporarily shut down for >2 months. YTD, FY21 net profit rose 36% to RM182.1m from RM134.2m in FY20 on the back of 4% hike in revenue. This was mainly driven by HRO unit with operating profit more than tripled to RM89.2m from RM20.0m on strong car sales, favourable forex and government’s reliefs, while NFO earnings rose 7% to RM278.5m from RM259.8m which was due to lower prize payout estimated at 62.7% from 64.3% which mitigated an 8% decline in ticket sales.

1QFY22 likely to be in the red again. As the NFO players are still not allowed to start operations (since June), we expect this to continue till end of Sep for four months from our previous assumption of three months. As such, the upcoming 1QFY22 is likely to be in the red again after the MCO 1.0-hit loss-making 4QFY20. This leads us to cut draws assumption to 132 from 146 but with unchanged ticket sales of RM19.9m/draw. At the same time, we also increase HRO’s EBIT forecast to RM78m from RM18m. Hence, this raises FY22E estimates by 15% with NDPS upgraded proportionally based on unchanged 80% payout. We also introduced new FY23 forecast with earnings forecasted to grow 65% with draws day back to 176 and ticket sales to grow at 1%.

Maintain OP on attractive valuations. We still like this yielding stock which is supported by its earnings resiliency which will swiftly rebound on outlets re-opening, making it a good avenue for income seekers. We expect ticket sales to pick up swiftly to 80%-85% pre-COVID level on reopening and a full recovery is expected in FY23. Post earnings revision, our DCF-derived TP is trimmed slightly to RM2.42 from RM2.43. It remains as an OP. Risk to our call is a slower-than- expected ticket sales recovery and unfavourable luck factor.

Source: Kenanga Research - 23 Aug 2021